Latin America

Economic Snapshot for Latin America

November 12, 2014

Growth prospects for Latin America deteriorated again in November, marking the fifth consecutive downward revision to the region’s 2015 economic outlook. LatinFocus Consensus Forecast panelists cut their projection by 0.2 percentage points and now expect regional GDP to increase 2.2% next year. The revised forecast reflects lower growth prospects for Brazil, Chile, Colombia, Ecuador, Peru, Uruguay and Venezuela, while projections for Bolivia, Mexico, and Paraguay were left unchanged. Argentina was the only economy for which panelists raised their projections although the country is still expected to experience a second year of recession.

Recent data suggest that Latin America’s economy may have finally bottomed out in Q3, though economic growth is expected to remain lackluster for the remainder of the year. Consequently, economists surveyed by LatinFocus lowered the region’s GDP growth forecast for 2014 by 0.1 percentage points over the previous month to 1.1%, continuing the downward trend that began a year-and-a-half ago. If the growth forecast is confirmed, this will be the region’s worst economic performance since 2009. 

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The global economic recovery remains tentative amid a backdrop of mixed developments in advanced economies and recent oil price dynamics. The global recovery depends largely on the resilience of the U.S. economy, which is sustaining the gradual pace of recovery as indicated by the latest GDP data. At its 28–29 October monetary policy meeting, the U.S. Federal Reserve announced the end of its asset purchase program (QE) that began in 2008, which was aimed at maintaining ultra-low interest rates in order to prop up economic growth. Questions remain, however, regarding both how the Fed will manage and then unwind its record USD 4.5 trillion balance sheet and when the Fed may start raising the federal funds target rate. 

On the other side of the Pacific, the outlook for the Japanese economy, dragged down mainly by sluggish private consumption and continued weak industrial production, is continuing to deteriorate. The Japanese government downgraded its assessment of the economy for the second consecutive month in October. In an unexpected move on 31 October, the Bank of Japan decided to expand its QE program in order to provide support for growth and to tackle downside risks to the country’s inflation outlook.

In the Euro area, growth prospects are grim. Although the results of the stress tests released on 26 October provided some relief regarding concerns over the health of the European banking system, economic activity in the common currency area continued to show insufficient improvement and thus fears of deflation risks going forward are mounting. 

Overall, it seems that the diverging growth trend between the U.S. economy and the rest of the developed world will persist in 2015. If favorable global liquidity conditions and low oil prices prove to be permanent rather than transitory, these factors will provide additional tailwinds for some economies at least.
 
Turning back to Latin America, the growth projections for Brazil and Mexico—which together account for the lion’s share of the region’s output—continued to diverge this month. In Brazil, President Dilma Rousseff beat Aécio Neves in Brazil’s tightest presidential election ever. Many analysts expect that the narrow result will prompt President Rousseff to change her economic policies, but uncertainties persist regarding the extent to which the government is willing to adopt the needed changes. Based on the growth outlook for 2015, Brazil’s economic situation is likely to be challenging and it remains to be seen whether the new administration of President Rousseff can improve the lackluster economy, given that it will control a reduced majority in the Chamber of Deputies from 1 January 2015. LatinFocus Consensus Forecast panelists expect Brazil’s GDP to increase a timid 1.1% in 2015 (previous estimate: 1.3%), following the anemic 0.3% rise forecast for 2014.

In Mexico, the economic recovery in the first half of the year was slower than expected, however the latest economic data suggest that the economy is gaining traction in the second half. Economic performance in H2 continues to benefit from the ongoing upturn in the U.S. economy. Mexico’s outlook reflects improving growth prospects for the United States and a solid reform agenda that pledges to ramp up the Mexican economy in the medium and long term. Nonetheless, while the administration of President Enrique Peña Nieto has taken important steps toward implementation of the all-important energy reform, the government’s timetable for effecting the reform by-laws is narrowing. Consequently, the government is now facing increasing pressure from different fronts. Forecasters surveyed by LatinFocus expect the economy to increase 2.4% in 2014 before accelerating to 3.7% in 2015, which is unchanged from last month’s forecast.

The Venezuelan government recently presented the 2015 budget, which included unrealistic assumptions yet again. At the official exchange rate, projected expenditures stand at USD 117.7 billion, which represents a 35% increase over the 2014 budget. The official budget in Venezuela only provides a partial view of the government’s spending plans, as it has been designed with severe underestimations for oil revenue. The budget was planned assuming that the price of the Venezuelan mix of crude oil will average USD 60 per barrel in 2015. However, recent data show the price oscillating around USD 78 per barrel and LatinFocus analysts project a price of USD 86.3 per barrel for the Venezuelan mix in 2015. Oil revenue inevitably outperforms the budget target and the government uses the extra revenue on a discretionary basis or channels it through different development funds. Nonetheless, next year the buffer is expected to be smaller, given the projected fall in global oil prices. Moreover, the government projects that the economy will expand 3.0% in 2015, but most analysts surveyed by LatinFocus remain highly skeptical of the official forecast. In fact, they anticipate that the economy will register a second year of recession following the economic contraction of 3.0% estimated for 2014. Panelists slashed Venezuela’s 2015 forecast by 1.0 full percentage point over the previous month and now see the economy contracting 0.8%.

Against a backdrop of sluggish domestic demand and relatively contained inflation, most central banks across the region decided to either maintain or lower interest rates at their latest policy meetings. In Mexico, the Central Bank (Banxico) left its target for the overnight interest rate unchanged at 3.00%. In the same vein, the Colombian Central Bank (BanRep) and monetary authorities in Peru (BCRP) held their interest rates at 4.50% and 3.50%, respectively. Chile’s Central Bank decided to cut its key monetary policy rate from 3.25% to 3.00%. The only exception was Brazil, where the Central Bank’s decision surprised the markets. At its latest meeting, monetary authorities decided to raise the SELIC interest rate by 25 basis points to 11.25% amid concerns over inflationary pressures.

Inflation expectations for Latin America increased in November over last month. LatinFocus panelists expect the regional average to close 2014 at 12.4%. Panelists raised their projections for 2015, as concerns mount regarding Argentina’s and Venezuela’s ballooning inflation expectations. They see inflation closing next year at 11.3%, which is up from the 11.1% projected in October.

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